China to make targeted RRR cuts to support debt-to-equity swaps: state planner

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BEIJING (Reuters) - China will use policy tools such as targeted cuts in banks’ reserve requirement ratio (RRR) to support debt-to-equity swaps this year as it seeks lower corporate debt levels, the country’s state planner said on Wednesday.

Long-term funds released by central bank’s RRR cuts will serve as an incentive for banks to quicken the replacement of debt with equity in firms struggling beneath a mountain of debt.

“We will use monetary policy tools, including targeted RRR cuts, to actively provide stable, low-cost medium- to long-term funding for market-based debt-to-equity swaps”, the National Development and Reform Commission (NDRC) said in a statement.

China would also let firms tap capital markets, including raising funds via initial public offerings, to help their debt-to-equity swaps and deleveraging, the NDRC said.

The government would also speed up the elimination of zombie firms, it said, referring to indebted or loss-making companies that need government support to continue operating.

In July, the central bank made its third RRR cut of the year to support debt-to-equity swaps, and it also boosted credit support for small firms.

BALANCING RISKS

China will better balance its financial risk prevention and support for the real economy, maintaining its deleveraging drive while also paying attention to its pace and intensity, the top decision-making Politburo said in its latest meeting last month.

And an adviser to the central bank said last week that China should limit the credit impact of the country’s financial deleveraging drive.

Swapping debt for equity will bring down the liability-to- asset ratios at major state-owned firms, said Zhang Yi, Beijing-based chief economist at ZHSR-Capital.

“In general, China has to stick with the deleveraging campaign as the accumulation of debt might create huge risks if the economy faces downward pressure in the future,” Zhang added.

Economic growth slowed modestly to 6.7 percent in the second quarter, with outlook clouded by an escalating trade dispute with the United States, rising corporate borrowing costs and steep declines in Chinese stocks and the yuan.

China has made some progress in lowering corporate debt under a multi-year deleveraging drive, even as a crackdown on riskier lending practices has pushed up borrowing costs.

China’s policymakers have been pushing for debt-to-equity swaps since late 2016 to ease pressure on debt-ridden firms.

China’s corporate debt ratio fell 0.7 percentage point last year to 159 percent of GDP - the first decline since 2011, according to data from the People’s Bank of China, suggesting some success in Beijing’s deleveraging campaign.

The corporate debt mountain mostly stems from state-owned firms that have traditionally received the bulk of state stimulus funds and bank loans.

The NDRC said it would start to keep track of state-owned firms who warrant special attention and supervision and will specify time-bound for reductions in their debt-to-asset ratios.